Q

What is a life insurance beneficiary?

A

A life insurance beneficiary is the person or organization that you choose to get your policy's death benefit when you die.

Rebecca Shoenthal author photoAmanda Shih author photo

By 

Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

 & Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is an editor and a licensed life, disability, and health insurance expert at Policygenius, where she writes about life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Updated December 9, 2021 | 4 min read

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Your life insurance beneficiary is who or what your policy is paid out to after you die. You can choose your beneficiary, with a few restrictions. Most people name a person who relies on them financially, like their spouse.

Read on to learn about the different types of beneficiaries, who to name on your policy, and how to ensure that they actually get the death benefit.

Key Takeaways

  • Name a contingent beneficiary in case your primary beneficiary cannot accept the death benefit.

  • You can name multiple life insurance beneficiaries, including organizations like a charity.

  • Updating your beneficiary after big life events ensures the payout is paid as you intended.

Who can be your life insurance beneficiary?

You can choose a person, legal entity, or organization to be your life insurance beneficiary. Common choices include:

You can have multiple beneficiaries and specify the percentage of your death benefit each person receives. For example, you could leave 80% of the payout to your spouse, 10% to a business partner, and 10% to charity. If you don't specify, the default is an even split.

Name both primary beneficiaries and contingent beneficiaries in your policy. Contingent beneficiaries get the death benefit if your primary beneficiaries can't accept it.

There are additional restrictions to consider if you plan to name a child or trust as your beneficiary, or if you want to name someone other than your spouse in a community property state. 

Naming your spouse as your beneficiary

Most people use life insurance to as an income replacement and choose their spouse as their primary beneficiary so their life insurance proceeds can help pay the bills or cover future expenses, like your kids’ college tuition.

In the nine states with community property laws, you need your spouse’s consent to name someone other than them as your beneficiary:

  • Arizona

  • California

  • Idaho

  • Louisiana

  • Nevada

  • New Mexico

  • Texas

  • Washington

  • Wisconsin

Alaska, Tennessee, and South Dakota have voluntary community property laws. [1] Community property laws requiring your spouse’s consent on named beneficiaries only apply if your policy goes in force after you get married. 

Naming minor children as your beneficiary

We don’t recommend naming your children as beneficiaries if they’re still minors because it can delay their access to the money. It’s best to name your spouse or a trust as a beneficiary to ensure the money is spent according to your wishes.

Otherwise, when they file a claim on your policy, the death benefit will go into a trust overseen by a court-appointed guardian until the child reaches the age of majority, which is 18 or 19 years old depending on your state.

Naming a trust as your beneficiary

When you name a trust as your beneficiary, an appointed conservator receives your death benefit and disburses the money on your behalf. A trust is best used as a beneficiary in specific circumstances, like to:

  • Avoid estate taxes on your death benefit

  • Ensure your payout benefits your minor children

  • Protect a less conventional beneficiary, like a pet

If you name someone to inherit your pet or be the legal guardian of your child in your will, a trust lets you specify that the death benefit is used for your intended beneficiary’s care and how. A certified financial planner can help you determine your estate planning needs.

What happens to life insurance with no beneficiary?

If you don’t choose any primary beneficiaries or if they die before you, the insurance company will pay your benefit to your estate. This can significantly slow down distribution of your life insurance benefit because it’ll be subject to probate, when the courts determine who should get your assets. 

If you have a high net worth and your death benefit goes to your estate, your family may also have to pay an estate or inheritance tax.

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Who can change the beneficiary on a life insurance policy?

Keeping your life insurance beneficiaries up to date is one of the best things you can do to protect your loved ones. The policyholder is the only person who can make changes to a policy’s beneficiaries. Review your policy after major life events, such as:

  • Beneficiary’s death

  • Birth of a child

  • Divorce

  • Marriage

→ Learn more about who can change your life insurance beneficiary

How is the death benefit paid to life insurance beneficiaries?

After your beneficiary submits a life insurance claim, they will receive their designated portion of the death benefit by check or bank transfer. There are a few common ways to get the money:

  • Lump sum: The entire amount is paid out all at once. Most people choose this option because it is tax-free and can cover immediate expenses, like your funeral or mortgage payments.

  • Installment or annuity: The benefit is distributed in monthly or annual installments over a set period. This option is best for people who have no immediate financial obligations.

  • Retained asset account: The benefit is held in a checking account by the insurer and you make withdrawals as needed. The unused funds earn taxable interest.

You can also choose to pay your beneficiaries per capita or per stirpes in the event one beneficiary dies. Per capita, in which the remaining beneficiaries receive an equal split, is the default and works for most people. 

Per stirpes reserves a deceased beneficiary’s payout for their heirs. The option is best if you want your insurance proceeds to benefit your beneficiary’s family.

→ Calculate how much life insurance you need to protect your beneficiaries

Can a life insurance beneficiary be denied the death benefit?

There are rare scenarios in which the life insurance company may not pay out the death benefit. The situations usually involve misrepresentations found during the contestability period or deaths that are excluded by a policy, like a death while doing an illegal activity. 

If the insurance company denies a death claim, they typically refund any premiums the policyholder paid previously.

→ Learn more about when life insurance won’t pay out

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Do beneficiaries pay taxes on life insurance proceeds?

The money received from a life insurance payout isn’t considered taxable income and doesn't need to be reported on a tax return. However, there are some situations in which a beneficiary will need to pay taxes on money related to the life insurance payout:

  • Benefits paid as an annuity: When beneficiaries choose to receive their payout in installments, the undistributed funds may gain interest. That interest is subject to taxation.

  • Estates subject to taxation: If your assets total $12.06 million or more and your policy pays to your estate, the death benefit is included in the calculation for any estate or inheritance taxes your beneficiaries will pay.

Your life insurance beneficiaries are the main reason to purchase your coverage, which makes it all the more important to make sure that they actually receive the death benefit. Update your policy regularly, keep your beneficiaries in the know about your policy, and work with a certified financial planner to safeguard your family’s financial security.

→ Learn more about how life insurance works

Frequently asked questions

Who should be your life insurance beneficiary?

Your life insurance beneficiary can be anyone, but most people choose someone who would suffer financially if they died.

What happens when the beneficiary of a life insurance policy is deceased?

The funds are split among the surviving primary beneficiaries or go to your contingent beneficiaries. If there are no contingent beneficiaries, it is paid out to your estate.

What happens when there are two beneficiaries on a life insurance policy?

If there are two beneficiaries listed on a life insurance policy, the death benefit is distributed amongst them evenly, unless otherwise noted.

Who should you never name as your life insurance beneficiary?

Avoid naming your estate, your minor child, or your pet as a life insurance beneficiary, which can tie the funds up in legal proceedings.